Maximum Pessimism: Tech Stocks Trading Below Coal-Company Valuations

by Stephane FitchOctober 08, 2012

When I met John Templeton back in 2001 we didn’t discuss tech stocks very much. Given his fondness of shares with low PE ratios, I imagine he wasn’t normally a fan. He expressed some sadness that nobody had developed a less risky means of shorting overpriced shares. It might have allowed ordinary investors to benefit from the tumble in dot-com shares the previous year.

But you know, tech stocks can reach points of maximum pessimism, too.

I used YCharts’ stock screener to find a few tech concerns that might have given Sir John pause. I found four high-tech firms whose shares are trading at intriguingly low PE ratios.

They are QLogic (QLGC), a maker of computer networking gear based in Aliso Viejo, Calif., Xyratex (XRTX), a United Kingdom-based maker of data storage gear and hard drives, Power-One (PWER), a maker of solar inverters based in Camarillo, Calif., and ManTech International (MANT), a Fairfax, Va., consultancy that advises the government and private companies on matters of high-tech security, global logistics, systems engineering and the like.

These are not big companies, mind you. The smallest, Xyratex, has a market cap of just $200 million.

Peabody Energy (BTU), a coal producer hammered by the widespread switch to cheap and abundant natural gas – an unloved stock, if ever there was one – trades at a higher multiple than three of these unloved issues.

Sometimes highly levered companies trade at deceptively low PE ratios. But debt doesn’t seem to be the problem here. None of the four is overburdened by long-term debt according to our debt/equity ratio data.

I always like to double-check our debt/equity ratios; I look at each company’s total liabilities and see how high those stand next to their stock market caps. In the case of these four, their total liabilities are 13 percent of market cap (QLogic), 62 percent (Xyratex), 50 percent (Power-One) and 75 percent (ManTech). So yes, there’s leverage here, but not toxic levels of it.

Dividends? Yes, interestingly. Tech companies don’t tend to pay dividends, but two of these four do so.

I surfed around to a few other financial websites to check on what analysts are projecting for earnings from these four companies. None of them are expected to generate anything that resembles the kind of steady climbs in profitability that we love to see from tech firms. But all four companies are expected to show a reasonably healthy profit in 2012 and 2013.

If you’re hunting around for an unloved technology investment, one of these is worth further exploration. If you look at their five-year price charts, you’ll see that these tend to be volatile. The trick is to buy them when nobody else cares to then remember to sell when they spike later.